Great blog posts about macroeconomics

A Government that is Built on Tax Breaks Fails to Battle Inequality

During the Reagan revolution, the then chairman of the Senate Finance Committee Robert Packwood, proposed a robust and unusual defense of the tax exclusion on employer provided health insurance. He stated that the country’s relatively low demand for national health insurance is because of the tax exemption the government provides business’s when they supply health insurance to employees. Packwood explained that, if the government were to take away that tax emption it would decrease the number of people that received health insurance from their employers and increase the demand for national health insurance. This would increase the amount of money that the government would have to spend on national health insurance. This defense of the health care tax exclusion has been a major defense of other tax breaks in the past and today.

Out of the health care tax exclusion, many more tax breaks have arisen, including tax deductions for mortgage rates, college tuition, charitable donations, retirement savings, and more. Many people want to down size the government and some believe that tax exclusions are a way to cut taxes while still achieving social good at the same time.

The idea of shrinking the government with tax exclusions, however, is a dangerous idea because most tax exclusions are only available to the upper middle class and higher. Most of the middle and low class of society do not qualify for such tax exclusions. This argument is one used by many liberals in today’s society.

This criticism of tax exclusions is something that is gaining ground today. Many liberals argue that to really provide more social good for society, that we must do away with most tax exclusions and, with the increased revenue, provide more benefits to people in general. In a sense, they want to take the money generated from doing away with the tax exemptions and spend it on creating a safety net for everyone in society.

To put some perspective to this topic, here are some numbers on the issue. In 2011, social spending from the U.S. government accounted for almost 19% of all Gross Domestic Product. That is 3 percentage points less than in Norway and 11 percentage points less than in Denmark, two largely democratic states that provide their people with many social benefits. On the other hand, however, if you included the cost of tax subsities (tax exclusions) into the U.S.’s spending, the percent of GDP spent on social programs would increase to 21%.

In conclusion, some argue that these tax exclusions improve the welfare of the people and are good for society, but others argue that the money soceity saves on tax exclsions only reach the upper class and would be better used by the government, so that they could be equally distributed among all of society.

One thought on “A Government that is Built on Tax Breaks Fails to Battle Inequality”

I think the primary objection that most economists have is that these tax preferences create market inefficiencies. Companies give too much health insurance because it is tax preferences. People build houses that are too big because of the mortgage deduction. Etc, etc, etc.